The IRS has strict rules when it comes to deducting part of your home expenses for business purposes, but if you qualify it can mean a huge savings at tax time.  In general, the tests to determine the deduction of part of your home as a business are as follows.

You can take a deduction for the business use of your home only if you use a specific part of it  exclusively,  regularly and for your trade or business:
1.  As your principal place of business,

2.  As a place where you meet or deal with customers or clients in the normal course of your business, or

3.  In connection with your business, if the part is a structure that is not attached to your home.

There are exceptions to the exclusive use test if you: 

1.  Use part of your home for the storage of inventory or product samples, or

2.  Use part of your home as a day-care facility.

Exclusive use means only for business.  If you use part of your home as your business office and also for personal purposes, you do not meet the exclusive use test.  Regular use means on a continuing basis.  Occasional or incidental business use of part of your home does not meet the regular use test even if that part is used  for no other purpose.

You must be doing work in your home for the purpose of making a profit, rather than as a hobby.  Even if you do not actually make a profit during a certain year, you may qualify if the business is active.

Your home must be your principal place of business and/or the place where you meet with clients and customers and/or the place where you store inventory for resale at wholesale or retail.

Important Change for 1999

Beginning in 1999, new rules allow your home office to qualify as your principal place of business for deducting expenses for its use if:

1)  You use it exclusively and regularly for the administrative or management activities of your trade or business, and
2)  You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

To prevent possible problems with your taxes, keep detailed records, make the home office your principal place of business, have a clearly defined exclusive work area, and be sure that the most important functions of your business are performed at your home.  This would include phone calls, scheduling, bookkeeping, and record keeping.  Try to limit the amount of time you spend at any outside job site so that it does not exceed the amount of time you spend working at your home office.

There are other rules and exceptions to these rules, but the idea is in order to deduct a part of your home for business purposes, you must designate a room or part of a room that is used regularly for your business and is used for no other purpose. If you can do that, you can deduct the expenses for painting or repairing the business part of your home as direct expenses.  You can deduct the installation of a phone line or additional power outlets.  You may also deduct expenses that apply to your entire home by calculating the percentage of your home dedicated to your business and using that percentage on expenses.
These could include:

· Real Estate Taxes
· Deductible Mortgage Interest
· Casualty Losses
· Rent
· Utilities and Services
· Insurance
· Repairs (interior or exterior)
· Security Systems
· Depreciation
· Household Supplies

Home Business Expenses

The part of a home operating expense you can use to figure your deduction depends on whether the expense is direct, indirect, or unrelated and the percentage of your home that is used for business

Direct being expenses only for the business part of your home (i.e. repairs only in the area used for business).  Indirect includes expenses for running your entire home (i.e. real estate taxes, utilities, & general repairs). Unrelated expenses are only for the parts of your home not used for business
(i.e. lawn care, painting a room not used for business).

Examples of deductible expenses include:  Supplies, such as stationary, phone expenses, entertainment (under certain conditions), advertising, commissions and fees, legal and professional services, rent or lease of equipment, bad debts, insurance, loan interest, and of course, employee costs if you have employees. 

Other kinds of expenses can be deducted over a period of years.  These would include equipment and furniture that have a life span in excess of one year. Do not forget to determine whether there are special tax bills that you could benefit from.  For  instance, the 1996 tax bill stated for tax years beginning after 1995, you may be able to deduct expenses for the part of your home you use to store product samples.  An important change for 1998 increases the section 179 deduction to $18,500 and for 1999 the total increase is $19,000. If you bought certain property to use in your business, you may be able to elect to deduct (rather than depreciate) all or a part of its cost as section 179 deduction.

Documentation

For any deductions you take for your business, the IRS requires documentation.
You must:

· Keep accurate records and receipts for all expenses
· Keep a mileage log for your car 
· Keep records for the part of your home you use for business
· Keep records for as long as they are important for any tax law.  This is
usually the later of: 1) 3 years from the return due date or the date filed,
or 2) 2 years from the date the tax was paid

Remember, this information is provided to show you the possible tax advantages of running a home business, not to replace competent tax advice.  Please consult your tax professional to be sure you comply with the law and  you get all the deductions you deserve.  Also pick up IRS Publication 587, Business Use of Your Home.  Always consult your tax professional or the IRS to keep current on changes in the tax laws

We have not covered State taxes since these would vary from State to State.
Be sure to get good advice on your state and local laws as well.

LaDonna D. Vick, Founder & Creator of  Mommy’s@Work
Copyright 1999 LaDonna Vick